The Economics of Mexican Drug Tunnels

In the last month, reports of underground drug tunnels from Mexico to the U.S. have enraptured the press. In Arizona, authorities discovered the 22nd tunnel in the last three years and we're not talking haphazard holes in the ground: the increasingly sophisticated conduits include rail lines, ventilation systems crossing mile-long stretches. But as the Drug Enforcement Administration keeps shutting them down, cartels keep building new ones. So how can the cartels afford this expensive game of Whac-A-Mole-Hole? Simple: Economies of scale. In a detailed exposé of the tunnel-building trade, Bloomberg Businessweek's Adam Higginbotham looks at how underground tunnels pose a win-win situation to the cartels:

Some tunnels cost at least a million dollars to build and require architects, engineers, and teams of miners to work for months at a stretch. A few include spectacular feats of engineering, running as much as 100 feet deep, with electric rail systems, elevators, and hydraulic doors. But the economies of scale are extraordinary. Tunnels like these can be used to move several tons of narcotics in a single night.

The tunneling boom reflects not only the extent and financial torque of the Mexican cartels’ operations—estimated in a 2010 Rand Corp. report to turn a $6.6 billion profit every year—but also the futile nature of attempts to secure the U.S. border against drug smugglers. A reliable index of the effectiveness of U.S. interdiction work, says Anthony Coulson, a former Drug Enforcement Administration agent, is provided by the price of narcotics on U.S. streets; when the authorities succeed in impeding the flow of drugs, the price goes up. Coulson began his career in Tucson in the early ’80s and retired as the head of the agency’s Southern Arizona district in 2010. In Nogales, Ariz., the wholesale price for marijuana is currently $400 a pound. “That’s never changed,” Coulson says, “in 30 years.”

According to Higginbotham, tunnels are both more lucrative and a lot easier to manage than the alternatives. And, yes, they've tried the alternatives, which include homemade submarines,ultralight aircrafts, and even catapults. All said, underground tunnels aren't going anywhere. So look forward to seeing more toy trucks in the future.